The Financial Accounting Standards Board’s (FASB) Not-for-Profit Advisory Committee (NAC) in September 2013 recommended changes in accounting rules designed to allow not-for-profit organizations to better report their finances. FASB tentatively decided to merge the three existing net asset classes currently required for not-for-profit financial reporting into just two: those with donor restrictions and those without. According to the NAC, the committee’s aim in revisiting current net asset classifications is to determine how they can be "relabeled or redefined, in conjunction with improving how liquidity is portrayed in a not-for-profit’s statement of financial position and related notes."

1. MHMMessenger
January 2014
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M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M
A publication of the Professional Standards Group
Net Asset Classes to Shrink from Three to Two if FASB Implements New Rules
The Financial Accounting Standards Board’s (FASB)
Not-for-Profit Advisory Committee (NAC) in September
2013 recommended changes in accounting rules
designed to allow not-for-profit organizations to better
report their finances.
FASB tentatively decided to merge the three existing
net asset classes currently required for not-for-profit
financial reporting into just two: those with donor
restrictions and those without.
According to the NAC, the committee’s aim in revisiting
current net asset classifications is to determine how
they can be “relabeled or redefined, in conjunction
with improving how liquidity is portrayed in a not-forprofit’s statement of financial position and related
notes.”
Net Asset Classes
The proposed change from three classes to two would
remove the distinction between temporary restrictions
and permanent restrictions. Not-for-profits would be
required to “describe the differences in the nature of
the restrictions and address both how and when those
resources could be used,” according to the NAC,
rather than differentiate temporary and permanent
restrictions as they do now.
our
In addition, FASB said that while it doesn’t anticipate
changes to the composition of unrestricted net
assets, changes to the label are in order. FASB wants
to modify the label to “Net Assets Without DonorImposed Restrictions” because, the board says, “the
term unrestricted may create misconceptions as to
the availability of net assets with that label.”
While the NAC is focused on simplifying the
presentation of the financial statements, FASB
indicated some concern that important information
could be lost with the new format. To prevent that,
FASB tentatively decided to require disclosure about
the composition of net assets at the end of the reporting
period. Possible examples of such disclosures are
reflected in the appendix to this Messenger. The major
differences between these two examples are how
the expendable and nonexpendable net assets with
donor restrictions are presented. These examples
are provided courtesy of NACUBO, an interested
observer.
Reaction from Colleges and Universities
Many institutions of higher education have expressed
concern over FASB’s potential changes. A key concern
seems to be how rating agencies or the Department
of Education would interpret the new presentation.
Schools worry specifically about how agencies might
use the new presentation to calculate the numerator,
or “expendable net assets,” for an institution’s primary
reserve ratio.
roots run deep
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2. MHMMessenger
To prepare for the possibility of these and similar
changes, institutions should provide sufficient detail
in their financial statement notes to ensure statement
users are able to fully understand when and how
net assets with donor-imposed restrictions can be
used. In addition, institutions should highlight any net
assets with donor-imposed restrictions that are not
permanently restricted. Schools should clearly explain
that, “unless there is a restriction in perpetuity, all net
assets are expendable to support mission-related
activities into the future.”
While these FASB changes are only tentative, they
are likely. An exposure draft of final recommendations
is anticipated by the first half of 2014. In order to keep
you up-to-date on FASB related projects, we will be
focusing a future newsletter topic on decisions reached
at the October and December meetings, specifically
the tentative decisions to improve the Statement of
Cash Flows and Statement of Functional Expenses.
For more information
If you have any specific questions about how these
proposed changes might impact your institution,
please contact Michelle Spriggs of MHM’s Professional
Standards Group or your MHM service professional.
You can reach Michelle at mspriggs@cbiztofias.com
or 774.206.8336.
The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
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3. MHM Messenger 2014-01 Appendix: Net Asset Classes to Shrink from Three to Two if FASB
Implements New Rules
NACUBO Disclosure Examples (For Illustration and Discussion Only)
Example 1: Composition of Net Asset Classes
Net assets were composed as follows at June 30, 20X2 and 20X1, respectively:
20X2
20X1
Without donor restrictions:
Available for use
Net investment in Plant
Board designated:
For capital projects
For debt repayment
Quasi-endowment
Total net assets without donor restrictions
With donor restrictions:
Expendable:
For capital projects
For scholarships
For research
Pledges pending receipt
Endowment available for appropriation
Nonexpendable:
Endowment restricted in perpetuity
Total net assets with donor restrictions
Net assets released from donor restrictions
Used for capital projects
Used for financial aid
Used for research
Payments received on pledges
Endowment payout for current operations
Total net assets released from restriction
Examples provided courtesy of NACUBO
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4. Example 2: Composition of Net Asset Classes
Net assets were composed as follows at June 30, 20X2 and 20X1, respectively:
20X2
20X1
Without donor restrictions:
Available for use
Net investment in Plant
Board designated:
For capital projects
For debt repayment
Quasi-endowment
Total net assets without donor restrictions
With donor restrictions:
Restricted for capital projects
Restricted for financial aid
Restricted for research
Pledges pending receipt
Endowment:
Restricted in perpetuity
Available for appropriation
Total net assets with donor restrictions
Net assets released from donor restrictions
Used for capital projects
Used for financial aid
Used for research
Payments received on pledges
Endowment payout for current operations
Total net assets released from restriction
Examples provided courtesy of NACUBO
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